Numerous obligations can diminish the legacy that you leave for your loved ones or your favorite charities when you die. If you have personal debt, the representative of your estate will need to pay your debts in full before they distribute your assets to others.
Paying taxes is also a very important part of the probate process. Even if you don’t think that estate taxes will apply because you don’t meet the multi-million dollar threshold for these taxes, income taxes could still affect what properties you leave for others. In fact, there are two different income taxes that could affect your estate.
You may die with personal income tax obligations
The representative of your estate will typically need to file a final tax return on your behalf. Even if you no longer had employment income, filing a final return and settling your remaining income tax obligations is an important step in the estate administration process.
The estate may be subject to income taxes
People frequently don’t realize that the estate could also be subject to income taxes. The instructions that you leave for the distribution of your assets could potentially trigger these taxes.
If you want to liquidate your assets and use the money as part of your legacy, the income from those sales could trigger tax responsibilities. Anything more than $600 in estate income will mean that the executor has to file an income tax return on behalf of the estate.
Identifying and planning for tax obligations when creating your estate plan can help you maintain a realistic idea about what you can leave to the people you love.